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July 11, 2013

Choice and Control: Regularly Review Your HNW Client’s Insurance

Successful people are used to making informed decisions, which may help to explain why they are successful. They warily evaluate the growth potential of different investments, purchase fine art and other valuables with a sharp sense of the financial appreciation, and assess business opportunities by discerning both benefits and drawbacks. Yet when it comes to buying insurance, scant thought, if any, is provided the subject.

I have wondered why insurance isn’t accorded the same diligence given to other financial judgments, and I think a reason might be that many insurance policies are a required purchase. Think about it—evidence of automobile insurance is required by statute, homeowners insurance is obligated by the mortgage application process and even health insurance will soon be a necessity for all of us to buy.

When a person is required to purchase something, less attention is given the particulars of the purchase. You’re mandated to buy it—consequently, you may not think much about it or ask questions and, subsequently, you may not make truly informed decisions.

Some readers might argue that automobile and homeowners insurance (and even health insurance) are commodity products requiring little need for discussion beyond the overall cost. Certainly, the billions of dollars spent to produce television commercials that emphasize low price above all else would explain these observations, erroneous as they are. The truth is that no two car insurance policies or home insurance policies are the same, nor should they be.

These thoughts gained greater clarity after a recent discussion with Diane Brinson, president and owner of Momentous Insurance, a Los Angeles-based insurance agency/brokerage serving a high-net-worth clientele. Diane hit the nail on the head when she said that insurance is a “living organism.” By this she means that as a person’s life, career and other personal circumstances alter, their insurance coverage must keep pace.

“All aspects of insurance tie into the client life cycle,” Diane said. “Clients sometimes are growing their wealth and sometimes divesting it. Children are born, go to college and strike out on their own. Careers change, expensive pursuits like travel or collecting art are undertaken and health issues arise. Each iteration, even subtle ones, changes the picture from an insurance perspective.”

She is absolutely right. As one’s circumstances change, it compels a host of questions about potential exposures and ways to transfer them:

Are the coverages broad enough to address the widest possible range of personal risks?

Are the financial limits of the policy high enough to absorb the new exposure outcomes?

Are there other policies like personal excess insurance that should be part of the risk-transfer portfolio or should the limits of such policies be vastly increased?

Is the insurance company providing these coverages financially solvent, stable and secure?

As Diane put it, “If clients or their financial advisors don’t sit down at least once a year to discuss the changes in their lives and how this affect their risk profiles, there is a very real threat of being underinsured, uninsured or insured by a distressed carrier.”

She makes an excellent point. Many insurance companies have suffered horrendous losses in their personal lines business in recent years, due to the expensive tally of natural disasters and other extreme events. These losses have weakened some insurers, which are reflected in their downgrades by the ratings agencies. With many more affluent individuals living in regions of the country susceptible to hurricanes, wildfires and earthquakes, this increases the potential for insured losses.

The Agent as Advisor

Affluent people also confront unique risks that average income earners avoid. Their wealth invites liabilities like slander, defamation, libel and bodily injury lawsuits. They may invest in fine art, vintage automobiles and rare jewelry pieces that are subject to theft and damage. They frequently serve as board directors and are thus subject to shareholder litigation and class-action lawsuits. Small wonder why Diane says their insurance needs to be reviewed each year “with a fine tooth comb.”

It’s all about choice and control—accepting the fact that significant wealth requires more attention toward personal risks and the optimum strategies to manage and mitigate these exposures. “Something as seemingly simple as making a determination between scheduling each piece of fine jewelry separately or buying a blanket policy to insure the entirety at a particular financial limit of protection requires a discussion,” Diane said. “These are not commodity products—certainly not for people of means.”

Indeed, insurance insists on a continuous dialogue between the insurance agent/broker, the insured and his or her advisor. Just because certain coverages are mandatory doesn’t obviate the reasons for a thoughtful evaluation of risks and a methodical insurance purchasing process.

No one has the energy or time to fill out a 30-page questionnaire on how their personal financial situation has changed. The far better alternative is to confer with one’s agent about the most critical risk factors, zero in on the causes, and then collaborate on a superior risk mitigation and insurance strategy. In other words, take control.